Reasons vary for spike in failed contracts

Are homebuyers walking away in droves from the contracts they've signed? Or are they unable to close deals because of financing and credit issues?

Are homebuyers walking away in droves from the contracts they’ve signed? Or are they unable to close deals because of financing and credit issues?

Whatever the answer, this much appears to be certain: Exceptionally large numbers of signed real-estate contracts fell apart last month. According to the National Association of Realtors, one of every six real-estate agents polled in June reported having signed contracts canceled before closing — up from just one in 25 a month earlier. The typical monthly cancellation rate during the past 16 months has ranged in a narrow band between 8?percent and 10 percent.

Lawrence Yun, chief economist of the realty association, says the sudden spike is surprising and worrisome and that there are no hard statistics available on the causes. The most likely suspects, Yun said, are low-ball appraisals and tough mortgage underwriting rules that knock buyers out of contracts through mortgage contingency clauses.

But a series of interviews with real-estate brokers across the country suggests that there might be other, subtler forces at work.

Buyers’ confidence about the direction of the economy has been badly rattled in the past six to eight weeks by the ongoing gridlock in Congress over raising the national debt ceiling and cutting the deficit. That, in turn, brokers say, is making buyers less willing to risk a major purchase, making them pickier and more demanding when defects are found in home inspections, and is frequently leading to contract cancellations for relatively minor reasons.

Inspections almost always turn up problems of one type or another, said Jessika Mayer of Coldwell Banker Plaza Real Estate in Wichita, Kan., “but lately buyers seem to be holding out for perfection.”

Maybe the inspection report estimates the remaining useful life of an air-conditioning system in a resale house to be two to three years. Or maybe a floor covering is worn and should eventually be replaced.

Whereas buyers who truly wanted a house might previously have let those issues pass, they now want the contract price reduced in compensation or demand that a replacement or repair be made before closing.

Some sellers are willing to negotiate, but others think the contract price is as low as they can go. If the parties can’t bridge the gap, the deal disintegrates.

The surging numbers of pending short sales are another cause of contract cancellations, brokers say. Buyers negotiating with banks often wait months to get answers from the bank on their offer, triggering repeated time extensions on the contract terms. Buyers eventually lose patience, throw up their hands and say forget it.

Finally, appraisal problems in many parts of the country continue to bedevil real-estate transactions, especially when inexperienced appraisers working for low fees overuse distressed property sales as comparables for nondistressed listings.

For example, Rod Smith, director of general brokerage at Coldwell Banker Chicora in Myrtle Beach, S.C., said a signed contract on a condo blew up recently when an appraiser valued it far below the agreed-upon sales price. That price, Smith said, was well in line with recent sales of similar units.

A subsequent review of the appraisal report turned up numerous errors, but the buyers chose not to appeal and pulled out of the contract after the lender urged them to refuse to pay the price to which they had agreed.

“The Realtor is trying to sell you a property at 40?percent over what it’s worth!” the lender reportedly told the buyers. No wonder they walked.